Why Fee-Only Is the Only Way to Go

VanderPol Investments is proud to be a fee-only advisory firm but what exactly does that mean? A fee-only financial planner is one who is compensated solely from the client. They do not accept any fees or commissions based on the sale of a product.

There are many benefits to choosing a fee-only financial planner. Fee-only planners have no inherent conflicts of interest because their compensation is not based on product sales. Fee-only planners are not influenced by an outside brokerage firm because their compensation is the same regardless of their recommendations. Eliminating potential conflicts of interest allows fee-only planners to offer more comprehensive advice to their clients. Many fee-only advisors are also committed to upholding a fiduciary standard in which they are required to always act in their clients' best interest. VanderPol Investments is a Registered Investment Advisor which means that our fiduciary responsibility to our clients is regulated by the state of Michigan. 

 

Fee-Based vs Fee-Only

Although they may appear similar, "fee-based" and "fee-only" are not the same. Fee-based financial planners may charge both fees and commissions based on the products they sell. Many fee-based advisors hold licenses that allow them to sell investments or insurance products for a commission. They may also have a revenue sharing agreement with certain product providers. This introduces unwanted conflicts of interest into the advising relationship. With a fee-only financial planner, you can be sure that your portfolio is being managed with your best interest in mind.

Learn more about VanderPol Investments' fee structure here.

2018 Is an Important Planning Year in Divorce Situations

by Randy Gardner, J.D., LLM, CPA, CFP®; and Julie A. Welch, CPA, PFS, CFP®

The Tax cuts and Jobs Act (the Act) repeals the above-the-line deduction for alimony and separate maintenance payments and makes such payments nontaxable to recipients. The change applies to divorce or separation instruments executed after Dec. 31, 2018. The revisions also apply to instruments executed before the effective date, if they are modified after Dec. 31, 2018 and expressly provide that new law will apply to the modification.

The Act revisions impacting divorce planning go beyond the alimony changes. A summary of the general tax principles in divorce and related planning strategies is set out in the table at the bottom of the article.

As a result of these changes, 2018 is an important planning year for clients in the midst of a divorce, contemplating a divorce, or needing to modify documents from a prior divorce. 

Whether it is better for a client to fall under old law or new law needs to be evaluated before the end of the year.

What is beneficial to one spouse in a divorce may not be beneficial for the other. Thus, for one client, you may be recommending old- law treatment, while with another client you may be recommending new-law treatment. Advising both spouses when they are going through a divorce always raises conflict-of-interest issues, but in 2018 it may be even more important to obtain signed disclosures and waivers before you offer advice to both sides.

There are three common alimony strategies to consider this year:

 

Reclassification of Child Support as Alimony

If soon-to-be ex-spouses are in different income tax rate brackets before Dec. 31, 2018, it may be beneficial to structure the divorce decree such that all or a portion of payments for child support,
a property settlement, and the spouse’s legal fees are treated as alimony.

Example. The client is in the 40 percent marginal federal and state income tax rate bracket and is willing to pay up to $24,000 of annual child support. The client’s spouse is in the 18 percent federal and state income tax rate bracket and wants at least $28,800 of annual child support. Both can stay close to their goals and perhaps reach a compromise by treating the payments as alimony. The spouse should be indifferent between receiving $28,800 in child support and $35,122 ($28,800/(1 – 0.18)) in alimony.

Because the client can deduct alimony payments but not child support, the cli- ent should be indifferent between paying $24,000 in child support and $40,000 ($24,000 /(1 – 0.40)) in alimony.

Whether it is better for a client to fall under old law or new law needs to be evaluated before the end of the year.

Reclassifying the payments from child support to alimony at an amount somewhere between $35,122 and $40,000, such as $36,000, accomplishes both of their goals. At $36,000, for example, the client will be out of pocket $21,600 ($36,000 x (1 – 0.40)), and the client’s spouse will receive $29,520 after payment of taxes.

 

Reclassification of the Imbalance in the Property Settlement as Alimony

After adding up the equity in the home, the balances in the retirement accounts, and the value of other properties and dividing the total between the two spouses, there is often a difference that must be paid by one spouse to the other to equalize the settlement. Property settlements are typically not deductible by the payer and not includible in the income of the payee. However, if this imbalance is paid by the higher-rate client to the lower-rate client and treated as alimony, both spouses may benefit. Assume the couple in the earlier example arrived at a property settlement that required the higher- tax-bracket spouse to write a $20,000 check to the lower-tax-bracket spouse.

If the payment is treated as alimony, the higher-rate spouse might write a check for $24,390 ($20,000/(1 – 0.18)), giving the lower-rate spouse $20,000 after tax. The higher-rate spouse is out of pocket $14,634 ($24,390 x (1 – 0.40)), significantly less than $20,000.

 

Reclassification of the Payment of the Ex-Spouse’s Legal Fees as Alimony

Assume the higher-rate spouse is responsible for paying the lower-rate spouse’s $15,000 legal fees. Treating the payment as alimony allows the higher- rate spouse to write a check for $18,293 ($15,000/(1 – 0.18)) to the lower-rate spouse. After tax, the higher tax bracket spouse is out of pocket $10,976 ($18,293 x (1 – 0.40).

Note that the reclassifications shown in these three examples are usually spread over at least three years and must be structured properly to receive the desired alimony treatment. The divorce or separation instrument language should be reviewed by the clients’ family law attorneys to ensure federal and state law requirements are satisfied.

The numerous Act provisions affecting divorce will have a ripple effect. 

From these examples, you can see part of the reason the Congressional Budget Office estimates that the elimination of the alimony inclusion and deduction will produce $6.9 billion of additional revenue for the government over the next 10 years. The additional revenue is also attributable to the “alimony gap.” The Internal Revenue Service says 361,000 taxpayers claimed they paid
a total of $9.6 billion in alimony in 2015, although only 178,000 taxpayers reported receiving spousal support.

The numerous Act provisions affecting divorce will have a ripple effect. States will have to adjust their child support and alimony tables and procedures. Fewer spouses will be willing to pay alimony, preferring instead to deal with income inequality through nontaxable property settlements. Battles for custody and the child-related credits will likely become more emotional.

Financial planners will play an increasingly important role helping clients resolve the conflicts associated with divorce, work through the short- term pain, and stay focused on the long-term financial implications of the marital split.

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Recent Market Volatility: Q1 2018

After a period of relative calm in the markets, in recent days the increase in volatility in the stock market has resulted in renewed anxiety for many investors.

From January 27th– February 9th, the US market (as measured by the Russell 3000 Index) fell almost 9%, resulting in many investors wondering what the future holds and if they should make changes to their portfolios¹. While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.

 

INTRA-YEAR DECLINES

Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.

 

Exhibit 1.   US Market Intra-Year Gains and Declines vs. Calendar Year Returns, 1979–2017

Picture1.png

In US dollars. US Market is measured by the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

 

REACTING IMPACTS PERFORMANCE

If one was to try and time the market in order to avoid the potential losses associated with periods of increased volatility, would this help or hinder long-term performance? If current market prices aggregate the information and expectations of market participants, stock mispricing cannot be systematically exploited through market timing. In other words, it is unlikely that investors can successfully time the market, and if they do manage it, it may be a result of luck rather than skill. Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump in and out of stocks. Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.

 

Exhibit 2.   Performance of the S&P 500 Index, 1990–2017

Picture2.png

In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data ©2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. One-Month US T- Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values. 

 

CONCLUSION

While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty. 


[1]. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

Source: Dimensional Fund Advisors LP.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.